S&P Setup for Short-term Technical Bounce But Rally Could be Short-lived

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday May 8, 2019.

Stocks sold off sharply in early Tuesday as increased uncertainty about a U.S.-China trade resolution contributed to a broad-based effort to de-risk.  The S&P was down as much as 2.4 percent before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge fell 1.65 percent to 2,884.05. The Nasdaq Composite was down 1.96 percent to 7,963.76.  The Dow Jones Industrial Average lost 1.79 percent to 25,965.09.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, soared more than 25 percent to close at 19.32.

Equity market began the day noticeably lower after USTR Robert Lighthizer accused China of reneging on its prior commitments, and said the higher 25 percent tariff rate on $200 billion of Chinese imports will go into effect Friday. China is prepared to impose retaliatory tariffs on U.S. imports, but it will still send Vice Premier Liu He to Washington to continue trade talks later this week.  Stocks that would be hurt most by the increase in tariffs include retailers, tech, and industrials. As such, the iShares PHLX Semiconductor ETF (SOXX) fell 2.46 percent on the day but is up more than 30 percent YTD, outperformed the S&P by a wide margin.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in SOXX.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  As shown, the underlying is in a short-term bullish trend when the price bars are painted in green.  The underlying is in a short-term bearish trend when the price bars are painted in red.  The yellow bars identify period of neutral or sideways trading pattern.  Additionally, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).  Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – iShares PHLX Semiconductor ETF (weekly)

Our “U.S. Market Trading Map” painted SOXX bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in 2015.  The second dominant feature of the chart is the downward trend since 2018.  The late 2018 selloff found support near the 38.2% Fibonacci retracement, a key technical level based on Fibonacci levels.  The early 2019 rally pushed the ETF above the 2018 highs, signify a bullish reversal and upside breakout.

SOXX moved down to test support at the 197 zone after recent rally ran into resistance near 218.  That level is significant in charting terms.  It roughly corresponds with the 2019 rising trend line and the early 2018 high.  A close below 197 will jeopardize the April’s bullish breakout signal and a test of the more important support near the 180 zone should be expected.

SOXX has resistance near 218.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2   – S&P 500 index (daily)

Short-term technical outlook remains bearish (sell).  Last changed May 6, 2019 from bullish (buy) (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P moved down to test support at the 2850 zone after breaking down below the important sentiment 2900 mark.  That level is significant in charting terms.  It roughly corresponds with the trend channel moving average and the early April breakout point.  As it was the case over the past years, pullback to the trend channel moving average offered excellent entry point.  Nevertheless, Money Flow measure is flashing a weak bullish signal as it diverged from price actions over the past months.  The indicator peaked in February and formed series of lower highs as prices ascending, suggesting less and less money are chasing the rally. So we’d be cautious against taking large position at this stage.

For now, 2856 is the line in the sand.  We’d turn particular bearish if the index closes twice below that level.

Short-term trading range: 2856 to 2900.  S&P has support near 2856.  A close below that level has measured move to 2775.  The index has resistance near 2900.  A close above that level has measured move to 2950-3000.

Long-term trading range: 2775 to 3000.  S&P has support near 2890.  A close below that level has measured move to 2775.  The index has resistance near 3000.  A close above that level has measured move to 3115.

In summary, while the US China trade concerns continue negatively affect trading sentiment, the fact that the S&P pulled back to level that had been successful in repelling price action in the past increased the probability for a short-term bounce. Nevertheless, market internal has been deteriorated following recent selloff so rally could be short-lived.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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